Getting into a franchese? Have strategy for getting out of it too

Published: Monday, November 5, 2012 at 1:00 a.m.

Last Modified: Saturday, November 3, 2012 at 4:55 p.m.

If you are planning to buy a franchise, also think about how you plan to exit.

More specifically, think about building equity during your ownership years and what initial steps you can take to boost your chances of a substantial payday when you eventually sell out.

The franchise agreement, for example, will likely give the franchisor the right to approve your buyer. Therefore, it is a good idea to question the franchisor about the process and seek assurances that buyer approval will not be unreasonably withheld.

Most franchisees lease their space. Be sure that your landlord cannot renegotiate the lease terms, increase rents or thwart the buyer from assuming your lease. Additionally, the lease should include ample renewal options so your buyer can stay in the same location to easily service your existing customers.

"If you're thinking about selling your business, you'd better start thinking of it three years earlier," says Michael Arrowsmith, managing director of the Tampa office for National Franchise Sales. "Your focus needs to be on building your business, building your sales, putting a strong team in place, managing your business and don't take your eye off the ball."

Arrowsmith, who specializes in brokering franchise re-sales, spoke at a BoeFly.com-sponsored webinar last month called "Best Practices in Buying and Selling a Business with a Focus on Financing." He said most buyers are looking for "strong businesses that they can improve."

Strong businesses provide significant earnings for their owners. They maintain up-to-date financial statements that include clear explanations of any ambiguities.

Ambiguities might occur because of the owner's legitimate strategy to lower income taxes by depreciating equipment and fully expensing everything that is permissible by the Internal Revenue Service. He may also choose to minimize payroll taxes by paying himself a lower salary and passing through higher dividends within IRS' guidelines.

As a result, the historic financial statements may not fully reflect all of the financial benefits that inures to the owner. For that reason, the owner should document how the financial statements would have looked if the owner had not made the tax-advantaged choices.

Higher earnings for the owner usually increases a company's value and selling price.

Neal Patel, certified business appraiser and principal of Cranbury, N.J.-based Reliant Business Valuation, told webinar participants that rules of thumb can come in handy to ballpark a company's value.

"The price to earnings multiple is pretty simple," he said. For example, if an "earnings stream is $100,000.00, a two times multiple would mean your value, the value of your business, is about $200,000.00."

The multiples vary by industry and company size.

The availability of acquisition financing may also play a role in your exit plan. Franchise broker Arrowsmith said that franchise re-sale buyers are generally, well-qualified, experienced franchise unit owners. "So they're able to get this financing that's out there for select brands and select type of buyers."

Websites for National Franchise Sales and Reliant Business Valuation are nationalfranchisesales. com and reliantvalue.com. To hear a recording of the webinar, read the transcript and view the slides, go to tinyurl.com/99gycge.

Jerry Chautin is a local volunteer business counselor with Manasota SCORE, Counselors to America's Small Business. Send business questions and stories to him at jkchautin@aol.com and follow him on Twitter.com/JerryChautin.

<p>If you are planning to buy a franchise, also think about how you plan to exit.</p><p>More specifically, think about building equity during your ownership years and what initial steps you can take to boost your chances of a substantial payday when you eventually sell out.</p><p>The franchise agreement, for example, will likely give the franchisor the right to approve your buyer. Therefore, it is a good idea to question the franchisor about the process and seek assurances that buyer approval will not be unreasonably withheld.</p><p>Most franchisees lease their space. Be sure that your landlord cannot renegotiate the lease terms, increase rents or thwart the buyer from assuming your lease. Additionally, the lease should include ample renewal options so your buyer can stay in the same location to easily service your existing customers.</p><p>"If you're thinking about selling your business, you'd better start thinking of it three years earlier," says Michael Arrowsmith, managing director of the Tampa office for National Franchise Sales. "Your focus needs to be on building your business, building your sales, putting a strong team in place, managing your business and don't take your eye off the ball."</p><p>Arrowsmith, who specializes in brokering franchise re-sales, spoke at a BoeFly.com-sponsored webinar last month called "Best Practices in Buying and Selling a Business with a Focus on Financing." He said most buyers are looking for "strong businesses that they can improve."</p><p>Strong businesses provide significant earnings for their owners. They maintain up-to-date financial statements that include clear explanations of any ambiguities.</p><p>Ambiguities might occur because of the owner's legitimate strategy to lower income taxes by depreciating equipment and fully expensing everything that is permissible by the Internal Revenue Service. He may also choose to minimize payroll taxes by paying himself a lower salary and passing through higher dividends within IRS' guidelines.</p><p>As a result, the historic financial statements may not fully reflect all of the financial benefits that inures to the owner. For that reason, the owner should document how the financial statements would have looked if the owner had not made the tax-advantaged choices.</p><p>Higher earnings for the owner usually increases a company's value and selling price.</p><p>Neal Patel, certified business appraiser and principal of Cranbury, N.J.-based Reliant Business Valuation, told webinar participants that rules of thumb can come in handy to ballpark a company's value.</p><p>"The price to earnings multiple is pretty simple," he said. For example, if an "earnings stream is $100,000.00, a two times multiple would mean your value, the value of your business, is about $200,000.00."</p><p>The multiples vary by industry and company size.</p><p>The availability of acquisition financing may also play a role in your exit plan. Franchise broker Arrowsmith said that franchise re-sale buyers are generally, well-qualified, experienced franchise unit owners. "So they're able to get this financing that's out there for select brands and select type of buyers."</p><p>Websites for National Franchise Sales and Reliant Business Valuation are nationalfranchisesales. com and reliantvalue.com. To hear a recording of the webinar, read the transcript and view the slides, go to tinyurl.com/99gycge.</p><p><i>Jerry Chautin is a local volunteer business counselor with Manasota SCORE, Counselors to America's Small Business. Send business questions and stories to him at jkchautin@aol.com and follow him on Twitter.com/JerryChautin.</i></p>